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FAR > F6 > Flashcards

F6 Flashcards

1
Q

What rate is used to calculate the PV of the lease?

A

Implicit rate (when known)

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2
Q

How do you calculate the current portion of income tax expense?

A

Taxable income * Effective tax rate for the current year

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3
Q

How do you calculate the deferred tax liability?

A

Temporary differences * effective tax rate for Future years

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4
Q

How are Deferred Tax Assets and Deferred Tax Liabilities reported on the Balance sheet?

A

Net of tax

ALWAYS NONCURRENT (asset/liability)

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5
Q

What is a Deferred tax asset

A

Deferred Tax benefit –> (Financial expense now, Tax expense later)

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6
Q

In a lease, what useful life is used to depreciate a capitalized equipment?

A

Depreciated with normal depreciation life

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7
Q

In a lease, what useful life is used to depreciate a leasehold improvement?

A

Shorter of:
1. Remaining life of the lease
2. life of the improvements

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8
Q

What is the primary objective of accounting for income taxes?

A

To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences

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9
Q

How are lease expenses allocated in an operating lease for lessee?

A

Lessee records lease expense on straight line basis (total pmts/total periods)

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10
Q

When translating foreign currency FS into reporting currency FS - what is items are not translated using the y/e exchange rate?

A

Common Stock and APIC - use the historical exchange rate

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11
Q

What are the 3 conditions for a sub entity to have the functional currency? (foreign currency = functional currency)

A
  1. They USE that currency
  2. Do their own banking
  3. not hyper inflationary`

IF ALL IS YES –> Translation

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12
Q

Where does the G/L from remeasurement go?

A

Income statement

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13
Q

Where does the G/L from Translation go to?

A

OCI

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14
Q

Where is the change in exchange rate G/L recorded?

A

In the IS

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15
Q

In remeasurement - what are the rates used in the B/S and I/S

A

BS: 1. If monetary (LT debt) = Year end rate 2. Non-monetary (inv, FA, CS) = historical (begininng)
I/S: If not B/S related (Sales)–> WA… if B/S related (depreciation, COGS) –> Historical cost

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16
Q

In translation - what are the rates for BS and IS?

A

B/S - Asset/Liab –> Y/E rate
CS –> Historical rate
IS –> Weighted Avg rate

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17
Q

What is the Criteria for a Lease?

A

Ownership transfer of the lease
Written purchase option for the lessee to purchase the lease at the end of the lease
the NPV of the FCF is 90% of the Fair Value
Lease is a substantial portion of the economic life of the asset (75% +)
Specialized asset

IF YES TO ANY –> Finance lease for lessee, Sales type lease to Lesor
IF NO TO ALL –Operating

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18
Q

When is there a direct financing lease for the lessor

A

Where the PV minimum lease pmts + residual value (guaranteed by third party, not lessee) >= 90%FV of the asset at lease inception

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19
Q

What are the 4 requirements for combination of contracts?

A
  1. 1+ contracts is a lease
  2. Contracts are for approx same time period
  3. same related party
  4. one contract affects consideration paid , contracts have same commcial objective
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20
Q

What are 3 things NOT included in Lease payments? (NGO)

A

Nonlease components
Guarantees of lessor debt by lesse
Other variable lease pmts

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21
Q

What rate is used for the discount rate?

A

Implicit rate if known (if not –> incremental borrowing rate)

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22
Q

What are the 2 criteria for sale-leaseback transaction sale?

A

Contract exists and Control has transferred to buyer

IF no transfer –> financing transaction

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23
Q

What are the two criteria to be a sale for lease back transaction?

A

Repurchase option
1. Options exercise price is same as underlying assets FV at time
2. Alt assets are sub equal to underlying asset a

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24
Q

If sale is met –> what is the FV of the asset?

A
  1. Determine which is more readily available
    –> Asset Sale price and FV OR PV of Lease pmts and PV of mkt rentaal pmts

whichever one is –> use diff to ID diff in data

25
Q

What is the difference b/n operating and finance entries for the payment annual pmts by lessee?

A

Operating:

DR: Lease expense
CR: Cash/ Lease Liab

DR: Lease liab
CR: Accum Amort - ROUA

Finance
DR: Interest exp
DR: Lease liab
CR: Cash/ Payable

DR: Amort exp
CR: Accum Amort - ROUA

26
Q

What are the three qualifications of a derivative?

A
  1. financial instrument that has underlying and notional amt
  2. No initial investment (or smaller than rec)
  3. Settled in cash or delivery of asset
27
Q

What is a main difference between future and forward contracts?

A

Future are public

Forward are private

28
Q

What are the two risks with using derivatives?

A

Market risk (risk market goes the way they do not want
Credit risk (risk that loser will not perform)

29
Q

what are the 3 types of hedges?

A
  1. FV hedge (hedge exposure of FV of A/L, G/L in IS)
  2. CF hedge (OCI) hedge risk of FCF
  3. Foreign currency hedge
30
Q

If buyer purchases a call option when will they benefit

If seller is in a call option when will they benefit?

A

Benefit when the price goes up bc the mkt price will then be higher than what they will pay for

Seller benefits when prices go down –> purchaser wont exercise

31
Q

When does the buyer and seller benefit from a put option

A

Buyer benefits when stock goes down (stock goes down –> can sell for a higher price)

Seller benefits when stock goes up (stock goes up –> they wont exercise the right)

32
Q

What are the two criteria in determine whether or not lease components are separate?

A

When BOTH are met:
1. Rights are not highly inter related or inter dependent
2. rights benefit lessee on standalone basis or combined

33
Q

What is the difference in allocating price of separate lease components vs combined? (i.e there is machine and maintenance)

A

Separate –> allocate consideration at standalone selling prices of lease and nonlease components (i.e Machine and maintenance would be separate)

Combined – allocated combined (machine and maintenance will be allocated together)

34
Q

In a direct financing lease - what are the components of the lease receivable for a lessor involved in a direct- financing lease?

A

Minimum lease pmt PLUS any residual value

35
Q

What is the concept that justifies determining periodic deferred tax expense?

A

Recognition of assets and liabilities

36
Q

What is the initial entry for lessor in Operating lease (also sub entries

A

Initial:
DR: Lease receivable
CR: Unearned income

1st pmt rec:
DR: Cash
CR: Rental income

DR: Unearned income
CR: Lease Receivable

DR: depreciation expense (useful life)
CR: A/D

37
Q

What is the underlying and notional amount in a derivative?

How do you calc the settlement amount

A

Underlying - $ of what could occur (ability to buy or sell at a certain price)

Notional - how many are we buying

Underlying * notional

38
Q

Where is the impact of

Cash flow hedge
Fair value hedge
Foreign currency hedge of a net investment

A

CF –> OCI
FV –> I/S
FCHNI -> OCI

39
Q

If first lease pmt is made at the beginning of the lease - what is the JE?

A

DR: Lease liab
CR: Cash (cash pmt amt)

**not interest

40
Q

What is the result of income taxes if a deduction is disallowed in the CY?

A

Tax income will be higher –> deferred liability

41
Q

In calc the initial value of a finance lease - how do you calc the PV of the lease with given the annual int pmt and written purchase price?

A

Annual Pmt * PVAD (or PVOA) = X

Written purchase option * PV of 1 = y

X+Y = PV of lease at inception

42
Q

In a sales type lease - how is the profit to the lessor recorded at inception?

A

PV of Lease pmts
- Carrying cost of the equipment

43
Q

For an operating lease - how would the lessee calc rent expenses?

A

Operating lease –> fixed rent expense –> therefore should charge rent of total rent expense over the total periods

44
Q

If a deferred tax asset is more likely than not to be realized in the future –> what is the result and the corresponding JE

A

Write down the DTA asset

DR: Income tax expense
CR: DTA Valuation allowance account by the full amount

45
Q

What is the impact of a permanent difference?

A

Will impact CY but no future impact (hence no Deferred tax on this)

I.e 750k income, 500k in muni bond int… Tax income = 250*current tax rate = Current year tax expense

46
Q

How is the classification different for: Life insurance proceeds for corporate officer vs Life insurance where company is not the benficiary

A
  1. Life insurance paid/proceeds to company beneficiary = PERMANENT DIFFERENCE
  2. Life insurance paid/proceeds not to company beneficiary –> no difference
47
Q

What is the difference between US bond income vs. City of MD bond income

A

City bond = municipal bond –> permanent difference

US bond is not

48
Q

If there is no more taxable income in the future –> what is the impact on DTA and what is the JE?

A

Will need to increase the allowance to get rid of remaining DTA

DR: Income tax expense
CR: DTA Allowance

49
Q

What is the difference in calculation of Current tax expense and deferred tax expense?

A

Current = TI * Current tax rate

Deferred = TEMPORARY DIFF * FUTURE TAX RATE

50
Q

How would cash received in advance classified (DTA OR DTL)

A

Deferred tax Asset (tax income now –> financial income later)

51
Q

What is the JE to record DTA and what is the impact on income tax expense?

A

DR: DTA
CR: Deferred Tax benefit (decrease expense)

Decrease Income tax expense

52
Q

When is a valuation allowance recognized?

A

If it is more likely than not (likelihood of more than 50%) that part or all of the DTA will not be realized (contra asset)

53
Q

How much net operating loss can be CFWD?

A

PY NOL can offset CY NI up to 80%

54
Q

How is the income tax liability impacted by estimated tax payments?

A

Current tax liab = TI * tax rate LESS Estimated tax pmt

55
Q

How is the TOTAL income tax for the year calculated

A

Current Tax liability (TI * Cy tax rate)

+ deferred tax Liability ( Temp DTL * Future tax rate)
- DTA (Temp DTA * Future tax rate)

56
Q

If tax income is higher than FS income now –> what does this create?

A

Deferred tax asset (lower tax income in future)

57
Q

What is the JE for Company A that sold equipment to company B for a Gain however is leasing back at an operating lease

A

Record Sale
DR: Cash (SP)
CR: Equipment (CV)
CR: Gain (SP-CV)

Record lease:
DR: ROUA for PV lease pmt
CR: Lease liab

58
Q

What is disclosed in the FS for deferred taxes?

A
  1. Type and amount of temporary differences
  2. Nature and amount of each type of operating loss and tax credit carryforward
59
Q

If title passes in a lease (hence finance lease) what is the useful life to be used in the lease?

A

the useful life of the asset (not the lease)

FAR (9 decks)

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